The sale of smaller RIAs fueled record M&A activity in the first quarter, but also led to a steep decline in average assets under management of the sellers.

The 44 transactions in the first quarter was the highest number of deals recorded for one quarter in the advisory industry, according to DeVoe & Co.’s most recent RIA Deal Book.

"Owners of these smaller firms are willing to trade off a degree of independence to become part of a larger organization and reap the benefits of scale," says David DeVoe, managing partner of the San Francisco-based consulting and investment banking firm.

Purchases of smaller firms by larger RIAs, which were formed by acquisitions themselves, have quadrupled since 2014 and now comprise 22% of all non-breakaway RIA transactions, according to the report. In these sub-acquisitions, parent companies are providing their affiliates through previous acquisitions with the capital and M&A expertise to become acquirers themselves.

DeVoe expects this trend to continue "with well over 100 affiliates in the marketplace today, each of which can acquire mid-sized and small firms that consolidators historically tend to pass over."

Firms with $100 million to $250 million in AUM accounted for half of the sales in the first quarter, according to the report, an approximate 30% increase in that segment's historical share.

The size of the firms, however, dragged down the average AUM of sellers 44% to $588 million, compared to last year's average AUM of just over $1 billion per seller.

Firms with $100 million to $250 million in AUM accounted for half of the sales in the first quarter of 2017.

M&A activity by banks spiked to 16% of transactions, up from an average of 2% to 3% per quarter.

Three transactions by First Republic brought $2.25 billion of new AUM to the firm. Fifth Third Bank, First Midwest Bancorp, Meridian Bank and Midland States Bancorp also entered the market, acquiring RIAs with AUM ranging from $180 million to $550 million.

“Because banks typically pay higher valuations, sustained acquisition activity from this buyer group could put upward pressure on valuations across the industry,” says Francine Miltenberger, a DeVoe managing director who helped author the report.

Bank valuations tend to be higher than average, according to DeVoe, because banks take into account what other buyers can't: "expectations relative to the potential for cross-selling."

In general, DeVoe says, RIAs with AUM ranging from $100 million to $250 million can expect an evaluation of four to six times EBITDA, or cash flow; RIAs with assets from $250 million to $750 million can expect a slightly higher valuation.

Firms with AUM between $750 million and $1.25 billion are usually valued at around six to eight times cash flow and RIAs with more assets can receive valuations of nine times EBITDA or more, DeVoe adds.

Consolidators, also called roll-ups or aggregators, also had a strong quarter on the buy side, the report noted, accounting for about 60% of sales.

Focus Financial Partners, HighTower Advisors and Steward Partners led the way, while Snowden Lane, Mercer Advisors, Bronfman E.L. Rothschild and Captrust were also active.

While aggregators are consistently dominant buyers, it has been nearly three years since they acquired a majority of the sellers in a given quarter, the report noted. Indeed, DeVoe points out that banks dominated the first wave of RIA M&A in the early 2000s, but were soon replaced by consolidators. Big RIAs then also became major buyers, followed by RIAs backed by private equity who became serial acquirers.

The election of Donald Trump has become an additional factor in the critical decision of whether advisory firm owners choose to sell or not.

An eight-year bull run in the stock market and a healthy sellers' market for RIAs may be incentive enough to put a firm up for sale, DeVoe says.

But some advisers believe the new administration will result in more growth, giving them a reason to retain ownership. Others, however, see the potential for political uncertainty domestically and abroad that could in turn, have an adverse impact the markets and client confidence.

As a result some RIAs "are reacting by moving forward with the sale of their firm in advance of their initial plan," according to the report.

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